Monetary Policy is Key As Milton Friedman and Anna Jacobson Schwartz
argued in a classic book,... the single biggest cause of the Great Depression
was that the Federal Reserve let the money supply fall by one-third, causing
deflation. Furthermore, banks were allowed to fail, causing a credit crisis.
Roosevelt’s best policies were those designed to increase the money supply, get
the banking system back on its feet and restore trust in financial institutions.
...

Today, expansionary monetary policy isn’t so easy to put into effect, as we
are seeing a shrinkage of credit and a contraction of the “shadow banking
sector,”... So don’t expect the benefits of monetary expansion to kick in right
now, or even six months from now.

Still, the Fed needs to stand ready to prevent a downward spiral and to
stimulate the economy once it’s possible.

Get the Small Things Right ...Roosevelt instituted a disastrous legacy
of agricultural subsidies and sought to cartelize industry... Neither policy
helped the economy recover.

He also took steps to strengthen unions and to keep real wages high. This
helped workers who had jobs, but made it much harder for the unemployed to get
back to work. One result was unemployment rates that remained high throughout
the New Deal period.

Today, President-elect Barack Obama faces pressures to make unionization
easier, but such policies are likely to worsen the recession for many Americans.

Don't Raise Taxes in a Slump The New Deal’s legacy of public works
programs has given many people the impression that it was a time of expansionary
fiscal policy, but that isn’t quite right. Government spending went up
considerably, but taxes rose, too. ... When all of these tax increases are taken into account, New Deal fiscal policy didn’t do much to promote recovery.

War Isn't the Weapon World War II did help the American economy, but
the gains came in the early stages, when America was still just selling
war-related goods to Europe and was not yet a combatant. ...

While overall economic output was rising, and the military draft lowered
unemployment, the war years were generally not prosperous ones. As for today, we
shouldn’t think that fighting a war is the way to restore economic health.

You Can't Turn Bad Into Good The good New Deal policies, like
constructing a basic social safety net, made sense on their own terms and would
have been desirable in the boom years of the 1920s as well. The bad policies
made things worse. Today, that means we should restrict extraordinary measures
to the financial sector as much as possible and resist the temptation to “do
something” for its own sake. ...

Our current downturn will end as well someday, and, as in the ’30s, the
recovery will probably come for reasons that have little to do with most policy
initiatives.

For critical responses, perhaps you can try the
comments section at Mark Thoma's. For reasons of space, it was not possible
to specify that I was praising the proposed Obama middle-class tax cut. I do
not, however, think it will do much (if anything) to end the current recession,
although tax hikes could make things worse.

James Kroeger makes this ridiculous claim in the post "The New Deal Didn’t Always Work, Either":Here you are guilty of conflating the two definitions of 'investment.' Rich people, generally, do not spend money on economic investments, but only on finan... [Read More]

Tracked on Saturday, November 22, 2008 at 09:17 AM

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"The New Deal Didn’t Always Work, Either"

I agree with some of this, but I don't think the main thrust of Tyler Cowen's lessons from the New Deal are the same as mine (e.g. see "Validating Fiscal Stimulus"):

Monetary Policy is Key As Milton Friedman and Anna Jacobson Schwartz
argued in a classic book,... the single biggest cause of the Great Depression
was that the Federal Reserve let the money supply fall by one-third, causing
deflation. Furthermore, banks were allowed to fail, causing a credit crisis.
Roosevelt’s best policies were those designed to increase the money supply, get
the banking system back on its feet and restore trust in financial institutions.
...

Today, expansionary monetary policy isn’t so easy to put into effect, as we
are seeing a shrinkage of credit and a contraction of the “shadow banking
sector,”... So don’t expect the benefits of monetary expansion to kick in right
now, or even six months from now.

Still, the Fed needs to stand ready to prevent a downward spiral and to
stimulate the economy once it’s possible.

Get the Small Things Right ...Roosevelt instituted a disastrous legacy
of agricultural subsidies and sought to cartelize industry... Neither policy
helped the economy recover.

He also took steps to strengthen unions and to keep real wages high. This
helped workers who had jobs, but made it much harder for the unemployed to get
back to work. One result was unemployment rates that remained high throughout
the New Deal period.

Today, President-elect Barack Obama faces pressures to make unionization
easier, but such policies are likely to worsen the recession for many Americans.

Don't Raise Taxes in a Slump The New Deal’s legacy of public works
programs has given many people the impression that it was a time of expansionary
fiscal policy, but that isn’t quite right. Government spending went up
considerably, but taxes rose, too. ... When all of these tax increases are taken into account, New Deal fiscal policy didn’t do much to promote recovery.

War Isn't the Weapon World War II did help the American economy, but
the gains came in the early stages, when America was still just selling
war-related goods to Europe and was not yet a combatant. ...

While overall economic output was rising, and the military draft lowered
unemployment, the war years were generally not prosperous ones. As for today, we
shouldn’t think that fighting a war is the way to restore economic health.

You Can't Turn Bad Into Good The good New Deal policies, like
constructing a basic social safety net, made sense on their own terms and would
have been desirable in the boom years of the 1920s as well. The bad policies
made things worse. Today, that means we should restrict extraordinary measures
to the financial sector as much as possible and resist the temptation to “do
something” for its own sake. ...

Our current downturn will end as well someday, and, as in the ’30s, the
recovery will probably come for reasons that have little to do with most policy
initiatives.

For critical responses, perhaps you can try the
comments section at Mark Thoma's. For reasons of space, it was not possible
to specify that I was praising the proposed Obama middle-class tax cut. I do
not, however, think it will do much (if anything) to end the current recession,
although tax hikes could make things worse.